Chinese FDI in the EU and the US by Tim Wenniges & Walter Lohman

Author:Tim Wenniges & Walter Lohman
Language: eng
Format: epub
ISBN: 9789811360718
Publisher: Springer Singapore

Renminbi’s Reserve Status a Strong Motivation for Further Financial Market Opening

Seen in this context, the Asian crisis gave China good reason to tread carefully when opening up its financial markets. The salient feature of its journey so far has been a prudent and the process of lifting of its capital controls was gradually albeit not in straight line. Investor programmes for individual market segments with limited and rising investment ratios have been designed to ensure that China retains control of cross-border capital flows. As for opening itself up to investor groups, China again took a gradual approach, with a distinct preference for long-term investors.

However, the liberalisation process has not always gone smoothly. For instance, China fought a bout of downward pressure on the renminbi which persisted since the summer of 2015 by using considerable reserve assets and restrictions on capital outflows. Effective though these measures were in the short term, one may wonder why China now wants to push ahead even more quickly with efforts to open its financial markets and why the topic is high up the political agenda, despite the aforementioned risks and problems. To approach the answer, it pays to look at some key figures which are important for the country’s self-image. China accounts for 18% of the world’s aggregate GDP. It is the world’s leader in merchandise exports, with a share of 13%, and is the number 2 merchandise importer at 11%. In the financial sector, China likewise occupies many of the top spots—even if the different stages of developments make it more difficult to compare cross-national. Its domestic bond market has the third-largest stock of outstanding bonds, behind Japan (number 2) and the United States (number 1), and the Chinese banking system is the world leader in terms of total assets, ahead of the euro area and the USA. In these categories, then, China has been in Champions League territory for quite some time already, and often with the prospect of having a lock on the title.

But there is another category, one that is important for China’s self-perception, where it is currently still far removed from such echelons: its currency’s status as a reserve currency. In 2016, the renminbi was included into the exclusive group of the now five key currencies which form the basis for the special drawing rights (SDRs) of the International Monetary Fund (IMF). Celebrated as a “historical milestone”, the practical impact, however, has been, to put it charitably, modest, as China’s currency accounts for a mere 1.8% of allocated global reserve assets. That is little more than the Australian dollar (1%) and less than the Canadian dollar (2%), neither of which is contained in the SDR basket, and virtually negligible compared to the share of the world’s leading reserve currencies, the US dollar (62%) and the euro (20%).

But it is precisely the title of leading reserve currency which is arguably the most coveted accolade. Back in the 1960s, Valéry Giscard d’Estaing, then France’s finance minister, said that the US dollar’s status

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